The benefits of IC Reporting

Transcription

1 The benefits of IC Reporting Abhijit Talukdar Founder, Attainix Consulting Introduction We live in the information era, a period during which knowledge organizations are leading the economy from the front. This is reflected in the massive growth of the services sector on the one hand. Industries such as IT (Information Technology) and BPO (Business Process Outsourcing), which were non-existent during the industrial era, are now the biggest job creators in this era. On the other hand, even the manufacturing sector - dominated by labor and capital equipment for decades - is seeing a steady shift in focus from production activities (which are being continuously outsourced) to design and marketing, both knowledge intensive activities. In like vein, even the agriculture sector is focused more on increasing productivity and the means thereof (green pesticides, genetically modified seeds, biotech, etc which are all knowledge intensive activities) rather than on sowing and harvesting, activities which have already been mechanized in the previous era. Companies in this era have therefore consciously come to realize the importance of making investments in their intangible assets, which are the holders of their knowledge capital and the source of their competitive advantage. This can be seen from the graph below, which shows the increasing amount of investments being made in intangibles by companies in the US, the largest economy in the world, over the last 50 years. Up until the 1980s, investment in tangibles used to be about 10% of GDP and that in intangibles was about 4% of GDP. Since the 1980s, which coincides with the proliferation of computers and the start of the knowledge era, investment in intangibles has constantly increased and that in tangibles has slightly decreased to the point where both now stand at about 9% of GDP. These intangible assets, comprising among other things the human skills and knowledge of employees, internal databases and processes and Customer relationships have come to be known broadly as the Intellectual Capital of the Company. Page 1 of 5

2 Source: working paper no intangible assets and national income accounting Leonard I. Nakamura Federal Reserve Bank of Philadelphia, October 2008 Let us take a closer look at the exact benefits that Intellectual Capital has to offer as well as some of the issues that come in the way of realizing these benefits. Benefit to Companies Companies could use information about their intellectual capital to fine tune their corporate strategy. As we know, Corporate Strategy is the set of planned actions that will result in giving a decisive competitive edge to the Company. Three general purpose strategies are seen very commonly low cost, niche product or service and regional presence. Each one of them requires the company to cultivate specific core competencies in order to leverage that specific strategic theme. Low cost produces need core competencies in the most optimal cost of production techniques. Niche providers of a product or service need to have overwhelming depth of knowledge in their area of specialization and be able to seamlessly scale up capacity with increasing demand. Finally, regional providers need to be able to localize their services to such an extent that it creates extensive Customer comfort and significant barriers of entry to competitors. In all three cases, relevant core competencies need to be nurtured and cultivated for sustaining the competitive advantage. Core competencies themselves are nothing more than combinations of intangible assets that come to play in a unified fashion for realizing the desired effect. For instance, Page 2 of 5

3 a company that has core competencies in microchip design would probably have a combination of talented chip designers, access to a rich database of information which details the limits and possibilities in silicon technology, a set of marketing professionals who are adept at expressing their Customers needs and very short and effective internal lines of communications. A Company that has discovered the true sources of its competitive advantage could therefore easily use that knowledge to make everyday improvements and continuously build barriers to entries for others. Moreover, such a company would also be able to optimize their capital expenditure by choosing to spend only in those projects that create value. Companies could also use information about their Intellectual Capital to convey the right image of themselves to various stakeholders, such as Investors and lenders for availability of capital at the most optimal rates. Customers for providing them more detailed and believable information about little known aspects of the company such as innovation and cost leadership. Potential employees giving them more awareness about attributes that form the culture of the company and for attracting the right employees. Potential suitors for right valuations of their intellectual property assets. Benefit to Providers of Capital Companies typically raise money for financing their growth using a combination of debt and equity. In either case, Companies could use detailed information about their Intellectual Capital for mutual benefit when dealing with both Lenders and Investors. An Intellectual Capital Report could greatly improve the perception of risk by providers of credit such as banks by lending to a Company whose value creation process is not only understood but is actively managed by the Company. Banks could therefore be willing to lend money to such companies on terms which are better than to those companies where the value creation process is not sufficiently clear. This would be beneficial for the bank as well since less risky loans would significantly lower the percentage of Non Performing Assets on the Bank s balance sheets. Unlike debt which is term oriented, equity investors get a stake in the company s ownership in return for investing in the company. Promoters of such companies therefore prefer their investors to have a long term view of their business and stay invested in it, just as they do. This objective is greatly fulfilled by an Intellectual Capital Report which not only outlines the value creation process but also enables Investors to judge whether that process is sustainable in the long term. Investors could use this information to optimize their investment portfolio and maximize their long term Page 3 of 5

4 returns. Moreover, if Companies also disclose the dollar value of their Intellectual Capital, Investors could use this information for their benefit by using it to discover under and overvalued stocks, thus improving the quality of their investment decisions. Benefit to Society at large Publishing and disseminating details about Intellectual Capital also benefits society at large. For one, it leads to efficient utilization of both debt and equity capital. This in turn leads to availability of greater amounts of capital which in turn can be utilized for creating more businesses and more jobs. Secondly, Intellectual Capital Reports also increases the awareness and confidence of investors in the core capabilities of the Company and enables them to stay invested during moments of crisis. This in turn leads to reduced volatility in the company s stock and in aggregate in the overall capital market. Finally, prospective candidates are able to use the information in the Intellectual Capital Report to target the right kind of companies matching their own profile. This leads to reduced attrition rates and considerably lowers the cost of acquisition and retention of employees for the Company. The savings so achieved directly flow to the bottom line of the Company s Profit and Loss account, benefiting both the Company and its investors. Obstacles to IC Reporting Thus we see the potential of Intellectual Capital Reports to feed upon itself for the mutual benefit of the Company and its investors. From the preceding discussion, it is amply clear that managing and publishing information about its Intellectual Capital is of paramount importance to every Company. The question that arises therefore is why does this not happen. What are the obstacles in the way? The answer to this question can be grouped into four broad categories. Not Allowed Accounting principles allow only acquired Intellectual Capital to be put on the Balance Sheet. Named goodwill, it represents the excess amount over the market value that one Company pays when acquiring another Company. These same principles require all internal spending on intangibles to be expensed immediately rather than be capitalized as assets and depreciated over time. Hence spending on the development of Intellectual Capital never shows up on the Balance Sheet as assets. Rather they show up as expenses in the Profit and Loss statement and impact the company s bottom line immediately. Page 4 of 5

5 Not possible Accounting systems keep track of finance by recording each and every monetary transaction as soon as it takes place. While this system works beautifully when keeping track of money, it fails when it comes to keeping track of the value of intangibles. This is because the value of intangibles can change without any transaction taking place. For e.g. a Company may conduct internal training to quickly familiarize new employees with the world class production processes followed by it. This will result in an increase in intangibles (number of employees trained in world class production processes) yet there will be no monetary transaction to reflect this change. Moreover, intangible assets are impossible to count and keep a tally of. Hence present day accounting systems deem it impossible to keep track of intellectual assets. Not desirable Companies are averse to divulging any more information about their operations other than what is absolutely required by law, in order to avoid giving away competitive knowledge. Not required Present day statutory regulations do not require companies to reveal information about their operations or the value of their business. The intention of the Balance Sheet is not to represent the value of the company but to match costs and revenues. Independent analysts that track companies in the capital markets use their own methods for arriving and reporting at the right valuation of Companies. Hence reporting on Intellectual Capital is a burden that Companies do not feel obligated to take. Summary Thus to a large extent, it is the myopic accounting view of reporting prevalent today that prevents Intellectual Capital data from being reported to the general public. Attainix Consulting therefore believes that a voluntary disclosure of Intellectual Capital data by means of an Intellectual Capital Report along with the regulatory financial reports will be to the company s own benefit as detailed at the start of this article. Moreover such reports will also enable investors to make better investment decisions and will benefit society at large by enabling efficient use of capital. Attainix Consulting focuses on providing software and consulting services that enable firms to convert their strategies to measurable actions. Attainix Consulting was founded on the premise of enabling organizations to manage their intangible assets. For more information, please contact us at or visit our web site at Page 5 of 5

WWW.ATTAINIX.COM What is Intellectual? Abhijit Talukdar Founder, Attainix Consulting info@attainix.com Introduction, in the business context, refers to any asset that will produce future cash flows. The

Mezzanine Finance by Corry Silbernagel Davis Vaitkunas Bond Capital With a supplement by Ian Giddy Mezzanine Debt--Another Level To Consider Mezzanine debt is used by companies that are cash flow positive

onetravel@aol.com 954-540-3697 Valuation Principles Good Afternoon! I want to thank all of you who have attended our round table discussion in regards to valuations. Having an independent valuation can

Basic Accounting & Budgeting February 4, 2009 The Nature of Accounting Systems Accounting is the process of recording, classifying, summarizing, reporting and interpreting information about the economic

Accounting Standard for Business Enterprises No. 33 - Consolidated financial statements Caikuai [2006] No.3 Chapter I General Provisions Article 1: These Standards are formulated in accordance with the

CASH FLOW STATEMENT & BALANCE SHEET GUIDE The Agriculture Development Council requires the submission of a cash flow statement and balance sheet that provide annual financial projections for the business

Financial Statements The financial information forms the basis of financial planning, analysis & decision making for an organization or an individual. Financial information is needed to predict, compare

FINANCIAL INSTITUTIONS AND MARKETS T Chapter Summary Chapter Web he Web Chapter provides an overview of the various financial institutions and markets that serve managers of firms and investors who invest

APX GROUP HOLDINGS, INC. REPORTS FIRST QUARTER 2015 RESULTS First Quarter 2015 Financial and Portfolio Highlights APX Group Reports Total Revenue of $149.9 Million, up 14.9% Year over Year Adjusted EBITDA

A Look at Exchange Traded Funds September 16, 2010 Exchange traded funds, or ETFs, are one of the fastest growing products in the investment industry. Used by both professional and individual investors,

Chapter 6 The cash flow statement The last four chapters have been spent looking at the balance sheet and income statement and how to use them. In this chapter, we will move on to arguably the most revealing

Real Property for a Real Retirement. Rent or Flip - Using your IRA or 401k to the fullest. Know the Right Time to Use Your Retirement Account and Get the Most From Your Real Estate Investments. 2011 CompleteIRA

Financial Terms & Calculations So much about business and its management requires knowledge and information as to financial measurements. Unfortunately these key terms and ratios are often misunderstood

APX GROUP HOLDINGS, INC. REPORTS FIRST QUARTER 2014 FINANCIAL RESULTS 1st Quarter Financial Highlights Total revenues of $130.2 million for the first quarter 2014, an increase of 21.8%, compared to $106.9

CASE STUDY CrediFactor The factor that multiplies earnings 1 IntroducTIOn CrediFactor commenced operations on March 17, 2000, taking on a major challenge, as factoring in Nicaragua was not yet developed.

Financing Options for Companies at Each Stage of Growth Nia Stefany Managing Partner Contents Introduction to Who We Are What is an Investment banker? Investment Bankers Value Proposition Investors Expectations

Transferring Your Company to Key Employees White Paper Owners wishing to sell their businesses to management (key employees) face one unpleasant fact: their employees have no money. Nor can they borrow

Is overvalued? An Introduction to Financial Analysis The fact that the stock price almost doubled during the last year, was evidence enough for many people to say that investors had gone crazy. Other people

How Merchant Services Can Restore Non-Interest Revenue Mike Halford is the senior VP of merchant sales for Security Card Services. He is primarily responsible for designing, building and managing our referral

Conceptual Framework for Financial Reporting Chapter 1: The Objective of Financial Reporting INTRODUCTION OB1. The first chapter of the conceptual framework establishes the objective of general purpose

Overview of Business Valuations By CA Niketa Agarwal Last few years have not been encouraging for the global economy due to crisis and slow recovery in several large and developed countries. India experienced

ALTERNATIVE FUNDING SOURCES FOR YOUR BUSINESS Alternative Funding Sources Poor financial management is one of the biggest reasons why more than half of small businesses don t survive. This is particularly

Practice Bulletin No. 2 INTERNATIONAL GLOSSARY OF BUSINESS VALUATION TERMS To enhance and sustain the quality of business valuations for the benefit of the profession and its clientele, the below identified

0 Learning Objectives: 14.1 Describe the important of accounting and financial information. 14.2 Differentiate between managerial and financial accounting. 14.3 Identify the six steps of the accounting

Answers to Concepts in Review 1. (a) In the money market, short-term securities such as CDs, T-bills, and banker s acceptances are traded. Long-term securities such as stocks and bonds are traded in the

The Application of International Accounting Standards in the Financial Statements of Tearfund Partners Context: International Accounting Standards (IAS) have been developed primarily to bring consistency

40 Statement on Standards for Valuation Services No. 1 APPENDIX B International Glossary of Business Valuation Terms* To enhance and sustain the quality of business valuations for the benefit of the profession

July 2009 Page 1 Are Bonds Going to Outperform Stocks Over the Long Run? Not Likely. Given the poor performance of stocks over the past year and the past decade, there has been ample discussion about the

For Banking and Financial Management Department School Year First Year First year Second year Third year Fifth year Fifth year Fifth year Fifth year Name of course Financial Accounting principles Intermediate

8 Steps for Analysing Listed Private Equity Companies Important Notice This document is for information only and does not constitute a recommendation or solicitation to subscribe or purchase any products.

VALUED REPRESENTATION When Selling a Business VR Has Sold More Businesses In The World Than Anyone. SELLING YOUR BUSINESS The entrepreneurial boom has changed the face of business around the globe. Today,

Long Term Business Financing Strategy For A Pakistan Business Byco Petroleum Pakistan Limited Contents Why We Need Financing Strategy 3 How Financing Strategies are driven? 4 Financing Prerequisite for

Australian Accounting Standard AAS 18 June 1996 Accounting for Goodwill Prepared by the Public Sector Accounting Standards Board of the Australian Accounting Research Foundation and by the Australian Accounting

Bank Regulatory Capital: Why We Need It Very simply: to limit risk and reduce our potential, unexpected losses. Unlike normal companies, banks are in the business of issuing loans to individuals and businesses

APPROVED by Resolution No. 10 of 10 December 2003 of the Standards Board of the Public Establishment the Institute of Accounting of the Republic of Lithuania 16 BUSINESS ACCOUNTING STANDARD CONSOLIDATED

BUYING OR SELLING A BUSINESS: A CHECKLIST FOR SUCCESSFULLY NEGOTIATING PRICE Phil Thompson Business Lawyer, Corporate Counsel www.thompsonlaw.ca A COMMON GOAL AND COMMON UNDERSTANDINGS Agreed: Our common

C&I LOAN EVALUATION & UNDERWRITING A Whitepaper C&I Lending Commercial and Industrial, or C&I Lending, has long been a cornerstone product for many successful banking institutions. Also known as working

Introduction to Financial Statements NOTES TO ACCOMPANY VIDEOS These notes are intended to supplement the videos on ASimpleModel.com. They are not to be used as stand alone study aids, and are not written

Cash Flow Louise Söderberg, 2010-10-15 Summary The statement of cash flow reports the cash generated and used during the time interval specified in its headings. A cash flow analysis is a method of checking

January 28th, 2013 Raising Capital, Doing Deals Presentation to Saïd Business School, Building a Business Class Henry Davis @henryshandle 2 There are reasons not to raise capital Reasons not to raise capital

2 Contractor/Retailer Business Models 2.1 CONTRACTOR/RETAILER DESCRIPTION The home improvement market includes a range of private-sector entities that currently provide or could offer home energy upgrade

Debt Financing for Healthcare Companies: The Current State of the Market Note: For the purposes of this paper, we will define healthcare as life sciences/biotech, medical devices, diagnostics and health

Chapter 10: The Globalization of Trade and Finance MULTIPLE CHOICE 1. The vicious cycle common to financial panics in Thailand was a result of a. investors deciding to hold off from selling and waiting

Alternative Asset Classes Page 1 ALTERNATIVE ASSET CLASSES: AN INTRODUCTION PART OF SOUND PORTFOLIO MANAGEMENT IS DIVERSIFYING INVESTMENTS SO THAT IF ONE TYPE OF INVESTMENT IS PERFORMING POORLY, ANOTHER

Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements In the United States, businesses generally present financial information in the form of financial statements

Investing in unlisted property schemes? Independent guide for investors about unlisted property schemes This guide is for you, whether you re an experienced investor or just starting out. Key tips from

HKFRS 3 Business Combinations 1 Nelson Lam 1. Objective of HKFRS 3 The objective of Hong Kong Financial Reporting Standard (HKFRS) 3 is to specify the financial reporting by an entity when it undertakes

Ladies and Gentlemen! Prospect Investment Company has been in operation on the Russian stock market since its origin. As far as the securities market in Russia is concerned, this period is equivalent to